Anyone seen the mutuality of obligationsaurus?
Mutuality of obligation (MOO) is a fundamental aspect of a contract of employment and an important status test when deciding on whether a contract falls inside or outside of IR35. Yet it feels as though this concept, developed over the years through the courts, has become a bit of a dinosaur. We all know of it but seldom is it spoken about nowadays.
Judge Nowlan presiding in the First Tier Tax Tribunal case of JLJ Services Ltd (2011) considered MOO to be “nebulous” and commented, “There is considerable case law in relation to this test, progressively indicating that the test is of diminished importance, or that is is indeed nearly meaningless.” This thinking however does not appear to be shared by his fellow judges, thankfully, who prefer to acknowledge the importance of this test.
MOO has never been something that HMRC have been keen to debate and that is probably because it can cause confusion and not just within the Revenue. There is no mention of MOO in the business entity tests and scarcely referred to in the scenarios that were published in May 2012. Nevertheless, HMRC have not abandoned this test completely as it still appears in their Employment Status Manual albeit down the pecking order.
Employment Status Manual 0543 begins by establishing the basic requirements of MOO that are necessary to determine whether there is a contract in existence, namely:
- that the engager must be obliged to pay a wage or other remuneration, and
- that the worker must be obliged to provide his or her own work or skill.
HMRC acknowledge however that these basic requirements could be present in either a contract of employment or a contract for services and, on their own, will not determine the nature of a contract and this would fit with Judge Peter Clark's comments in the Employment Appeal Tribunal case of Propertycare v Gover (2004), “the cases, starting with Ready Mixed Concrete show that mutuality is more than a simple obligation on the employer to pay for work and the employee to do the work.”
Where a worker undertakes duties for an engager and the engager pays the worker for carrying out the work then there will be sufficient MOO for a contract to exist. The question of MOO poses no difficulty during the period when the worker is actually working for the engager. For that duration the worker undertakes to work and the engager in turn undertakes to pay for the work done. The mutual obligations, i.e. to work on the one hand and to be paid on the other, will continue to exist until the contract is terminated and will provide the basic requisite mutual obligations.
No longer then will an absence of MOO post contract, i.e. there being no obligation for the end client to offer work once the contract has ceased nor for the worker to accept such an offer, be sufficient evidence to demonstrate an absence of obligations between the parties, although it should not be dismissed entirely.
The case of Synaptek v Young (HMRC) (2003) took MOO one stage further and two points were raised. It was accepted by HMRC that if there was no obligation on the agency to provide work for the entire period of the notional contract there was not sufficient MOO for a contract of service to exist. The judge distinguished between MOO beyond the contract and MOO within the contract and that mutuality should not be present during the current contract as well as there being no obligation to offer and accept work once the current contract is over.
In the First Tier Tax Tribunal case of Marlen Ltd v HMRC (2011), Mr Hughes (the contractor) provided engineering, design and drafting services, via his company, Marlen Ltd, to JCB. There were a number of occasions when the computer servers broke down and the contractors were sent home, without pay, whereas employees remained in place and were remunerated. This demonstrated that JCB did not consider itself under any obligation to provide work or pay even after an offer had been made and accepted. Marlen Ltd terminated the contract early when a better offer came up, further enhancing the belief of both parties that the contract could be terminated at any time without any consequence. The Tribunal came to only one conclusion: that the relationship between the parties was not one in which MOO was present.
Whilst Judge Nowlan may have had a somewhat bizarre view of the importance of MOO he did provide a poignant definition of MOO that encapsulates what this concept represents. He described it as a touchstone of being an employee as the hope and expectation of some relationship of faithfulness between employer and employee, i.e. an employer commits to providing continuous work for their staff even in slack times. Where there is a shortage of work, then contractors will be the first to go.
It is now important to address mutuality on all levels. There should be a clear lack of obligation both during the current contract and in respect of future works and where that is the case then a contractor will be on very strong ground to argue that IR35 does not apply and should never allow HMRC to brush the MOO argument aside or sweep it under the carpet as is their want. MOO lives on!
Written by Andy Vessey